Directors’ liability according to the regulations of the Hungarian Civil Code effective since March 15, 2014, in comparison with the former legislation.
The establishment of economic companies in Hungary was regulated by the 1988 Company Act. During the evolution of the last 25 years, the legislature realized that the institution of limited liability was continuously abused, thereby creating damage to private creditors, financial institutions and the state. Until the acceptance of the Civil Code of 2013 (Act No. V) directors were liable for the damage caused by their actions, however to a limited extent. Without listing each step in defining their liability, we would simply like to explain in what the new Civil Code created higher liabilities for directors.
Internal liability under the Companies Act IV/2006 (no longer in force)
Internal liability means that directors are accountable to the company itself for their actions. According to §30 of the Companies Act (IV/2006), the director had to carry out his or her activities primarily with the interests of the company in mind with the prudence generally expected of a person holding the position of director. They were liable to the company for violating the laws, the bylaws, the resolutions of the shareholders’ meeting, and their administrative duties if the violation was attributable to them. Violation is attributable in case of negligence or willful violation.
External liability under the Companies Act IV/2006.
According to (1) of §30, the corporation was liable for damages caused to third persons by its director in the course of performing its administrative duties.
If the company was in a situation threatening with insolvency, the directors had to carry out their activities with the interests of creditors primarily in mind.
The consequences of not protecting the interests of creditors in the case of threatened insolvency are defined by §33/A of the Bankruptcy Act XLIX/1991 (still in force). This situation occurs from the time when the directors of the company have foreseen or should have been able to foresee that the company would not be able to pay its debts on the due dates.
During the bankruptcy process, the liquidator may ask the court to establish, on behalf of the bankrupt company or registered creditor, that the directors who represented the company during the last three years prior to the commencement of bankruptcy and/or after the commencement of the situation of the danger of insolvency, did not carry out their activities for the protection of the interests of creditors, thereby causing the diminution of the company’s assets or, partially or wholly preventing the satisfaction of creditors or causing environmental damage.
Compensation for damages may be claimed from directors under the Bankruptcy Law within the framework of two lawsuits: in the first lawsuit, the court must find that the director did not act in the interests of creditors after the onset of the situation of the danger of insolvency.
Within 60 days of the publication of the closing of the bankruptcy case, creditors-in a second case-can demand payment of their unsatisfied claim under the bankruptcy proceedings from the administrator who was declared liable in the first case.
Many lawsuits have been initiated under § 33/A of the Bankruptcy Law, but obtaining payment of claims from administrators has remained a long and difficult procedure.
The provisions of the bankruptcy law remain in force so that liability to unpaid creditors under that particular law remains the same.
The system of liability under the current Civil Code
The Civil Code, under the regulation of legal persons contains a main regulation in §3:2 that concerns not so much the directors, but the shareholders, when it provides that the shareholder who has abused the limited liability is liable for unsatisfied claims, subsequent to the termination of the company.
According to §3:24, the director is liable for damages caused to the legal entity during the performance of his administrative duties according to the general rules on liability caused by breach of contract.
§6:142 defines liability for breach of contract. One must reimburse the damage caused by the breach. It may be exempt from liability if it is proved, that:
- the default was caused by a circumstance beyond his control
- such circumstance was not foreseeable at the time of entering into the contract
- avoidance of the damage could not be expected.
All three of the conditions must be proven to be exempt from liability.
In the case of negligence, damages that have arisen regarding the subject matter of the service must be reimbursed. Other possible damages must be reimbursed if the claimant proves that the consequences were foreseeable at the conslucion of the contract. If the damage was caused deliberately, the compensation must be full and complete. (§6:143)
Under §3:101 of the Civil Code, should the shareholders’ meeting refuse to initiate a lawsuit seeking damages against the director, 5 percent of the shareholders may initiate the lawsuit directly in the name of the company against the director. (Whereas under the “old” corporate law, such a lawsuit could only be initiated on the basis of a resolution of the shareholders’ meeting.)
According to §3:117, the shareholders’ meeting may issue a disclaimer in favor of the director approving his or her actions with respect to a certain period. Such a disclaimer implies, that a liability action can be initiated against the director only if the data or facts on which the disclaimer was based were not true or complete.
External liability under the current Civil Code
The §3:24 (2) provides for the liability of the administrator directly and jointly and severally to third parties if the damage was caused intentionally. The provision thus also incorporates the fact, already established in judicial practice in the context of damages caused by directors and officers, that if the director or officer intentionally causes the damage, he or she cannot escape liability by hiding behind the liability of the legal person, but is directly liable to the third party. Otherwise, the legal person is liable for any damage caused to third parties by an executive acting in that capacity.
The situation of the danger of insolvency remains relevant even under the current Civil Code. The §3:118 says that in the event that the company is closed without a legal successor, unsatisfied creditors can claim damages from the directors if the directors after the onset of the situation of the danger of insolvency did not represent the interests of the creditors.
The current Civil Code allows them to claim damages directly, without making a preliminary lawsuit. Liquidators, on the other hand, are still left with the option of §33/A.
The above report is informative only; each case must be studied individually.